Inflation watch: US producer prices see biggest surge on record

Those who fear inflation could pose a threat to the United States economic recovery got another dose of ammunition on Wednesday with the latest government data showing producer prices kept galloping upward in June.

The Producer Price Index (PPI), which measures prices that businesses fetch for the goods and services they sell, increased 1.0 percent in June, after rising 0.8 percent in May, the US Department of Labor said.

Over the past 12 months, US producer prices rose 7.3 percent – the steepest advance since annual numbers were first crunched back in November 2010.

Rising prices for services accounted for some 60 percent of the June advance in the PPI.

When businesses see prices rise, those costs are often passed on to consumers. Wednesday’s report on producer prices followed data released on Tuesday that showed US consumer prices in June experienced their sharpest one-month spike since June 2008, and their largest annual gain since August 2008.

A little bit of inflation is a good thing for an economy because it incentivises consumers to buy goods and services now, rather than sit on their wallets in expectation of prices dropping. But too much inflation can be deeply destructive if it triggers a vicious upward price spiral that prompts monetary policymakers to hike interest rates sharply and potentially derail the nation’s economic recovery from COVID-19.

The steward of the US economy, Federal Reserve Chairman Jerome Powell, is not worried about that happening. For months the Fed chief has repeatedly said that he and his fellow policymakers believe the current wave of higher prices is a temporary consequence of supply bottlenecks forming for raw materials and labour as businesses en masse cast off COVID-19 restrictions to meet the demands of reinvigorated consumers.

In prepared remarks for Congressional testimony he is set to deliver later on Wednesday, Powell repeated the Fed’s view that inflation “will likely remain elevated in coming months before moderating”.

But other economists and data watchers are worried that inflation may not be all that temporary and that the Fed may act too late to tame it.

There is some evidence to suggest that price spikes could be peaking.

Strip out volatile food, energy and trade services, and producer prices rose 0.5 percent in June after increasing 0.7 percent in May. Over the year, they gained 5.5 percent last month – the biggest advance since that data was first calculated in August 2014.

For now, the Fed is sticking with its pledge to not raise interest rates until the nation’s labour market has fully healed from the ravages of the coronavirus pandemic.

In June, the nation’s unemployment rate was 5.9 percent – well above its pre-pandemic level of 3.5 percent. And there were 9.5 million unemployed workers last month.

But in May, there were 9.2 million job openings in the US. And in a signal of how confident some Americans feel about their employment prospects, some 3.6 million of them quit their jobs in May.

Some blame the $300-a-week federal top-up to state unemployment benefits for acting as a disincentive for the jobless to pound the pavement in search of work. Others cite fear of COVID-19, too many businesses chasing the same type of workers at once, and childcare challenges for keeping the unemployed from taking jobs.

Dozens of states – most of them led by Republican governors – are withdrawing from federal unemployment benefit programmes that include the $300 a week top-up.

To entice job candidates to take open positions, some businesses have been raising wages or offering signing bonuses. Some economists are now concerned that rising wages could trigger a wage-price spiral. But others point out that paycheques for low-income Americans had fallen behind before the pandemic, and they are simply getting a long-overdue raise.